What is dropshipping?
Read our complete guide on everything you need to know about starting a dropshipping business and what to watch out for.
If you're thinking of setting up an ecommerce business or just a side hustle to earn some extra cash, you'll probably have heard of dropshipping. Dropshipping allows you to sell online without having to worry about manufacturing, storing or shipping products – that's all managed by a dropshipping supplier.
But while it sounds simple in theory, setting up and running a dropshipping business can be quite complicated. This guide explains how dropshipping works, how to find a dropshipping supplier and how to increase your chances of success when selling online.
What's in this guide?
- What is dropshipping and how does it work?
- Is dropshipping worth it?
- How to start a dropshipping business
- Finding the right items to dropship
- What marketplaces allow dropshipping?
- How to find dropshipping suppliers
- How to increase your sales
- Common problems you might run into
- Do I need a business licence?
- Do I have to pay taxes on dropshipping in Australia?
- Bottom line
What is dropshipping and how does it work?
Dropshipping is an online selling business model that doesn't require you to keep any items in stock. Instead, whenever you sell an item to a customer, you buy that item at wholesale cost from a third-party supplier. This supplier then ships the product directly to the customer on your behalf.
This means that you never actually store or handle the product yourself. Essentially, dropshipping means selling someone else's products and taking a share of the profits.
Here's how it works:
- A customer purchases a product from your online store.
- You forward the order and the customer's delivery details to a wholesaler or manufacturer (the dropshipping supplier).
- The dropshipping supplier packs the order and ships it to the customer on your behalf.
Is dropshipping worth it?
Dropshipping can offer a simple way to earn extra income on the side or help your ecommerce business grow. However, there's no guarantee of making a profit, so it's essential that you plan carefully and set your dropshipping business up for success. The following are some key steps you should take:
- Research the market. Market research is crucial to help find a niche segment or product type you can target. You'll also need to research your competition to get a better idea of how to price your products and an idea of which sales and marketing strategies are most effective.
- Crunch the numbers. Dropshipping sounds like an easy way to make money but that isn't always the case. You'll need to calculate your predicted income as well as any overhead costs and the time required to run a dropshipping store before deciding if it's worth it.
- Find a good supplier. Finding the right supplier(s) is essential, so compare a range of businesses before deciding who you want to work with. If your supplier sends out defective items, is slow to ship products or is simply uncommunicative, it could cause big problems for your business.
How to start a dropshipping business
You'll need to complete the following steps if you want to set up an online dropshipping store:
- Make it legit. If you're selling online as a business rather than a hobby, you'll need to register for an ABN. An ABN is also often a prerequisite to do business with many dropshipping suppliers.
- Choose your products. The second step is finding in-demand products that you can sell for a profit. We'll explain more about how to do this in the next section.
- Find suppliers. Now it's time to partner with reliable dropshipping suppliers who can manufacture, store, pack and ship products on your behalf. Check out the "How to find dropshipping suppliers" section further down this page for more info.
- Set up an online store. The next step is deciding where you will sell products online. This could mean setting up your own website or listing products on an ecommerce marketplace like Amazon or eBay. The main advantage of setting up your own store is that it gives you full control over site branding and managing your online presence. On the other hand, online marketplaces give you the potential to reach a much larger audience of potential buyers, so you may decide to sell through your own store as well as multiple marketplaces.
- Start selling. The final step is to list your products online and start selling. A detailed marketing plan, which can include everything from social media posts to paid advertising, is also crucial to help attract new customers and build a bigger business.
Finding the right items to dropship
Finding high-quality items that you can sell for a profit can be tricky, but doing as much research as you can will help. To start with, you should do the following:
- Research trending products. Use Google Trends and "top selling products" sections on various marketplaces to get an idea of what sort of items are in high demand.
- Find your niche. Select products in a niche that you are knowledgeable and passionate about. You'll also need to decide whether you want to sell products with widespread demand, which means dealing with a lot of competition, or focus on targeting a very specific market sector.
Consider pricing. You'll need to find a happy medium between products that are easy to market but that are also easy to sell for a profit. Don't forget to also consider packing and shipping costs and the effect they could have on prospective buyers.
Research the competition. Finally, conduct detailed research into other sellers that stock similar items. Will you be able to match or beat their prices and still make a reasonable profit?
Products and categories suited to dropshipping tend to include items that are relatively cheap and easy to ship. The following are some examples of products that are suitable for dropshipping:
- Phone cases
- Phone accessories
- Tote bags
- Skincare products
- Baby products
- Pet supplies
What marketplaces allow dropshipping?
You can use dropshipping to sell products from your own online store, but it's also permitted on a wide range of popular online marketplaces and ecommerce platforms, including the following:
Before you sign up for an account on any marketplace, check the terms and conditions to make sure dropshipping is allowed.
How to find dropshipping suppliers
You'll need to carefully compare a range of dropshipping suppliers to find a reliable partner for your business. Cost will be a major consideration, but you'll also need to factor in the supplier's track record and shipping times as well as its refunds and complaints handling processes. Perhaps even more importantly, any supplier you choose must be a prompt and effective communicator.
You can contact individual manufacturers and wholesalers directly, or find them using supplier directories like Worldwide Brands and SaleHoo.
Check out the table below for details of a few popular dropshipping supplier directories.
Use the following checklist of questions to help you find the best dropshipping supplier for your needs.
Checklist: Choosing a dropshipping supplier
- How long has the company been in business?
- Can you easily access information about where the company is based and who runs it?
- Are there legitimate reviews and testimonials from existing customers?
- Are products competitively priced?
- How long will the supplier take to ship items to customers? Which countries does the supplier ship to?
- Is the supplier willing to send samples of the products you're considering selling?
- Does the supplier have sufficient inventory? Will they be able to cope with increased demand if your business grows?
- Is there a minimum order size?
- What are the supplier's processes for dealing with returns and damaged products?
- How responsive is their customer support?
- Do they offer insurance and fraud protection?
How to increase your sales
The following are some of the strategies you can adopt to help boost sales for your dropshipping business:
- Marketing. Blogs and email marketing campaigns can help you attract new customers and encourage repeat business.
- Social media. Maintaining a strong social media presence helps increase the credibility of your business and also helps increase brand awareness.
- Reviews. Encourage happy customers to leave reviews for your online store – this will help prospective customers decide whether your business is legit.
- Paid advertising. There are also myriad paid advertising options available, including everything from promoted marketplace listings to banner and display ads.
- Search engine optimisation. Whether you're selling on a marketplace or through your own store, make your site and listings SEO-friendly to increase visibility in search results.
Common problems you might run into
There are a few key risks and problems you'll need to be wary of when dropshipping:
- Defective supplies. The reliability of your dropshipping supplier is crucial to the success or failure of your business. You don't have any control over storage or shipping, so it can be difficult to ensure the quality of the items you sell to customers.
- Missing inventory. Keeping track of inventory can be a major challenge, particularly if you're sourcing products for your store from multiple warehouses that are also fulfilling orders for other retailers.
- Shipping complications. If a customer orders two products from your online store, each of which ships from a different international warehouse, this results in two separate shipping costs.
- Customer service. While your supplier takes care of manufacturing, storage and shipping, you're responsible for customer service. If there's a problem with an order, for example if the customer requests a refund, you'll need to be the go-between to sort out an unhappy customer's issue with your supplier.
- Low profit margins. One of the biggest attractions of dropshipping is that you don't need to invest a whole lot of money to get a business off the ground. However, the profits are also low, with most of the money from each sale going to the dropship supplier.
- Fierce competition. Because it's simple and cheap to set up a dropshipping business, you can expect to face stiff competition from other entrepreneurs.
- Expecting easy income. On the surface, dropshipping seems like a simple way to earn passive income. However, you'll still need to put in plenty of time and effort to give your business the best chance of success.
- Fees. Finally, don't forget that many dropshipping suppliers also charge ongoing monthly or annual fees.
Do I need a business licence?
If you're selling products online as a business rather than a hobby, you're required to register for an ABN. Check out this guide from the ATO to understand the difference between a business and a hobby.
There are a couple of other important reasons why it's a good idea to register for an ABN. Not only will many dropshipping suppliers refuse to partner with you unless you have an ABN, but when you have an ABN you can also obtain an Australian domain name.
The good news is that it's easy (and free) to register for an ABN online.
Depending on what you're selling, you may also be required to apply for other business licences and permits. Visit the Australian Business Licence and Information Service (ABLIS) for more details.
Do I have to pay taxes on dropshipping in Australia?
There are two main types of tax you'll need to consider when dropshipping: income tax and GST.
If you're selling online as a business, you'll need to report all your earnings to the ATO. And if your business has an annual turnover of $75,000 or more, you'll also need to register for and charge GST.
In addition, as of 1 July 2018, the ATO also introduced new GST rules. If you dropship low-value imported goods (valued at $1,000 or less) to Australian customers, you may need to charge GST on these items. You can find more information from the ATO or by contacting a registered tax agent.
Ultimately, dropshipping is worth considering if you're looking to build an ecommerce business. But if you approach it expecting to earn easy money, you'll be setting yourself up for failure.
A successful dropshipping business requires careful preparation and planning as well as an ongoing commitment to make each customer's experience as smooth and seamless as possible.
So, if you think dropshipping is the way forward for your online business, it's time to start researching your options.
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